YOUR MONEY: No customer stickiness: Both policyholders & insurers hurt by mis-selling

August 10, 2021 2:15 AM

According to the latest annual report of IRDAI, renewal premiums consisted of only 54.75% of the total premiums received. This is abysmally low given the fact that the average premium paying term of a life insurance policy has been estimated to be about 15.

Data science has to be used more intensively to personalise products and services. In other words, the business model has to undergo a metamorphosis.

By Tushar Chatterjee

A life insurer seems to be in a perpetual dilemma over whether to focus on improving topline or bottom-line. Indian insurers have long decided to go for the topline. Even the regulators are appreciating the efforts of insurers in getting topline growth only. When they say that the industry has grown by 7.49% last year, what they refer to is the growth of new business. Although new business is the life blood of any life insurer, the overall health depends on total premiums received during a year which includes renewal premiums.

According to the latest annual report of IRDAI, renewal premiums consisted of only 54.75% of the total premiums received. This is abysmally low given the fact that the average premium paying term of a life insurance policy has been estimated to be about 15.

This means, the renewal premium should be a few times more than the first premium. If the insurers earn less and less renewal premiums, they cannot generate enough valuation surpluses which in the insurance industry are considered a good proxy of profit from insurance business. If surplus is less, the bonus for policyholders will be less and dividends for shareholders will also be less. Since more life insurers are getting listed (including the market leader LIC), the emphasis is expected to shift towards building better bottom-lines.

Low renewal premium collection
It is a vicious cycle for the insurers at the moment. Since the collection of renewal premium is low, they have to be desperately looking for new business all through the year. In their acts of desperation, the tied agents and the corporate agents keep on selling products that many policyholders very soon find not of much use. Higher rate of lapsations and surrenders mean lower collection of renewal premiums. That means the insurers have to procure new business, no matter what the quality of that business is. This completes the vicious cycle.

No wonder persistency ratios of almost all life insurers are low. While declaring the persistency ratio, many insurers mention the 13-month persistency ratio which is usually as high as 70% or even 80%. However, a policy contributes to the bottom-line of an insurer only when it is kept in force for a minimum of five years. Now, the 61-month persistency ratios are below 50% for all but two life insurers.

Lower cost of operations
Insurers will start focusing more on reducing operational expenses. Their digital infrastructures will be strong enough to support Work From Home options. Many of the interactions with the customers and intermediaries will be tech driven, resulting in lower operational expenses. There will be better use of digital marketing tools to sell and service the policies.

To improve the bottom-line, certain things have to be addressed immediately. Insurers have to ensure that each policy is sold according to specific insurance needs. Customer engagement programmes should be set up to arrest cases of early lapsations and surrenders. Customers should not find any reason to be aggrieved with the insurers.
Insurers cannot leave the job of maintaining proper relationships with customers only to agents. Gone are the days when the agents happened to be the best family friends cum financial advisors. Today’s intermediaries do not have patience or energy to build the business. Data science has to be used more intensively to personalise products and services. In other words, the business model has to undergo a metamorphosis.

The writer is an insurance industry analyst

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Krisumi Corporation partners with Savills India to market Krisumi Waterfall Residences in international markets
2Home Loan: Should you repay it or invest if you have lump sum money?
3This Credit Card offers free health check-up, wellness treatment and big discounts at gyms, spas!